FinMin says flexible inflation is working well

Flexible inflation targeting the monetary policy regime has been successful in providing a favorable environment for economic growth, as well as reducing the rate of inflation within a range, with the Finance Ministry stating that its ‘tried and tested’ Explaining the decision to stick to the model.

The government last week retained the 4% inflation target with an upper and lower tolerance range of 6% and 2% respectively, adopted for the first time in 2016, for a five-year period from April 2021 to March 2026. While the repo rate dipped from 6.5% in March 2016 to 4% in March 2021, the headline inflation during the period was 3.9% on average as compared to 7.5% during 2013-16, the ministry reported.

The target of flexible inflation led to a fall in price fluctuations, which reduced the volatility of core inflation, and raised inflation expectations of urban households on the horizon a year ahead. Interest rate and exchange rate volatility also decreased during 2017-20, the ministry said in its monthly economic report for March.

“Until pre-COVID period, there was only one opportunity [Q4 of 2019-20] When inflation exceeds the upper tolerance level, ”the ministry said. “This violation occurred due to sharp drop in food inflation. [9.7%] On a combination of adverse events, ie, late monsoon withdrawal, unseasonal rains and associated supply constraints, ”the ministry said.